February 7, 2024

Keep it in the Fam: Succession Planning for Family Business

When done effectively, succession planning for a family business eases the transition of power to the next generation, and provides stability for the business. When done ineffectively, it can be the cause of failed relationships and a failed business. The tug-of-war between the next generation’s eagerness to gain control and the current leadership’s unwillingness to relinquish said control can be the source of extreme tension.

In this article we’ll explore what a successful succession plan looks like, and why it’s so important.

Elements of a Successful Succession Planning Process

Two critical factors that go into a successful family business succession planning process are trust and empowerment. In many cases, current leadership does not trust that the next generation is ready to take the reins. The next generation feels this distrust, and doesn’t feel empowered to share perspective that could be vital to the organization’s future success.

According to the Harvard Business Review, in a business setting, trust has three core drivers: authenticity, logic, and empathy. “People tend to trust you when they believe they are interacting with the real you (authenticity), when they have faith in your judgment and competence (logic), and when they feel that you care about them (empathy).”

Key elements of successful succession planning for a business include:

Allowing Sufficient Time to Create a Plan

It’s never too early to start allowing the younger generation to engage with the business. An open line of communication about the business helps lay a strong foundation that may ultimately lead to a successful transition when the time comes. Successful plans include ways to build bonds across generations and ensure that joining the family business is a win/win scenario for all involved.

core values building blocks

Understanding Each Party’s Core Values

What is considered important to one person, may not even be on another’s radar. Values in terms of the familial relationships, the business, and individual legacy are important to explore. We believe understanding what the individuals value about each other, and how they see themselves contributing to the future success of the business is vital to successful planning.

According to research from PWC, family businesses that had written their values out were better prepared for succession. The exercise of writing out values allowed them to be more communicative and transparent. Although 70% of businesses indicate that the family has a clear set of values, only 44% had actually written them down.

Embracing Differing Perspectives

Ideas come in all shapes and sizes. What worked for the business ten years ago may not be the best path forward. Both parties understanding the need to embrace differing perspectives on the table may help eliminate potential friction throughout the transition.

Promoting High-Trust Behaviors

Trust plays one of the most important roles in family business transitions. Both generations need to believe that they can depend on the other to execute their responsibilities in order for the business to succeed. The best transition plans include concrete methods of building trust, competence, and credibility. This results in a situation where both parties are confident in the transfer of power and authority.

Balancing Collaboration and Control

In all businesses, there is the potential for conflict over power and control. Sprinkling in strained family dynamics can magnify these already uncomfortable issues. There may be a tendency for founders to tighten control of the family business as the time to transition it approaches. This is contrary to what should be happening. To balance control with collaboration, the next generation’s participation should increase, and they should be given more autonomy as the transition nears.

Co-Designing Standards of Readiness

Assessing the readiness of the next generation to take over the business is often a primary concern of current leadership. Research highlights that 25% of failed transitions occur because of the lack of a prepared successor. Taking the necessary time to co-design standards of readiness ensures that both parties are aligned, and that the successor(s) have the confidence to step into a leadership role.

business succession plan post its

Why Having a Co-Designed Succession Plan is Crucial

Co-designing a succession plan directly spells out growth opportunities for the new generation, while also allowing the current leadership to share insights on competition, the history of the firm, and the ups and downs of owning a family business.

The lack of a co-designed transition plan can have disastrous results for a family business. In the event of a current leader suffering a sudden medical issue that impacts their ability to function optimally, the lack of a plan in place may truly cause chaos.

If after years of assuming the next generation would take over, they decide that they don’t feel included in the future growth of the business and they’re no longer interested in taking the reins, it could leave current leadership scrambling to find a potential buyer or path forward.

These and other nightmare scenarios are all avoidable by ensuring that a co-designed succession plan is created.

Finding An Advisor You Can Trust

The stress of not knowing where to start or what to do next can make succession planning extremely difficult. It is crucial to not only understand your pain points, but find an advisor who has experience helping other families navigate similar pain points to the ones that you’re currently facing.

We Care About Your Financial Future

At Crossover Capital, our number one goal is to provide people with the support, knowledge, and access to make informed decisions about their financial futures. Building a foundation for success starts with steady support and a customized approach. Crossover Capital is here to provide the necessary tools required for growth and to be a champion for our clients’ success.

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This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor.

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